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According to Moody's Credit Outlook, on 27 November, a day after Taiwan’s Financial Supervisory Commission said Chinese companies could issue Renminbi-denominated bonds in Taiwan -- so called Formosa bonds – to institutional investors, the Hong Kong branch of Bank of Communications applied to issue RMB1.2 billion of 3-year 3.4% bonds and 5-year 3.7% bonds.

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GreTai Securities Market, which reviews and approves bond listings in Taiwan, also announced on 26 November that in addition to the Chinese subsidiaries of Taiwanese-listed companies and banks, Chinese policy banks, state-owned commercial banks and joint-stock commercial banks could also issue offshore RMB bonds in Taiwan.

We believe that Taiwanese banks will benefit, and those with large outstanding RMB deposits, such as Mega International Commercial Bank (A1 stable; C-/baa2 stable) and CTBC Bank Co., Ltd. (A2 review for downgrade; C-/baa2 review for downgrade), will benefit the most.

The Formosa bonds will allow Taiwan’s banks to diversify their RMB assets and better match their RMB assets and liabilities. Taiwan has seen steady growth in RMB deposits since the formal establishment in February this year of direct RMB and Taiwan dollar clearing across the Taiwan Strait.

However, Taiwanese banks have limited options to deploy these offshore funds because China’s capital account restrictions prevent the free flow of funds back to mainland China.

Taiwan life insurers will also benefit because the Formosa bond market potentially widens their investment choices. If the Financial Supervisory Commission allows them to invest in these bonds, they will gain an additional outlet for their RMB-denominated insurance funds and improve asset-liability management.

Chinese banks will also gain broader access to offshore RMB funds. Experience from Hong Kong’s dim sum bond market suggests that Chinese banks will be active issuers of Formosa bonds because they need to fund their growing offshore RMB loans.

In 2012 and 2013, more than 55% of dim sum bonds were issued by Chinese policy banks or major Chinese commercial banks.

Banks have filled this gap by placing their excess RMB funds mainly in the interbank market, or partially in dim sum bonds. The Formosa bond market will broaden Taiwanese banks’ investment options.

Furthermore, dim sum bonds with significant size issued by major Chinese banks often offer longer tenors and higher yields over interbank rates, as tracked by the CNH HIBOR fixing rate. Therefore, we expect Taiwanese banks to also benefit from a yield pick-up on Formosa bonds, which will in turn help improve the margins on their RMB books.

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